Session 3: Financial Planning

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Session 3 Financial Planning Budgeting,
Contracting Contract Administration, Cash
Management and Investments
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Todays Presenters
Rebecca Gebhart Alameda County Janet
Hogan Tulare County Anne Kinney Government
Finance Officers Association
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What Well Cover Today
Agenda Review
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Session 3 Financial Planning Budgeting,
Contracting Contract Administration, Cash
Management and Investments
5
Todays Presenters
Rebecca Gebhart Alameda County Janet
Hogan Tulare County Anne Kinney Government
Finance Officers Association
6
What Well Cover Today
Agenda Review
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Financial Planning Budgeting

• Financial Planning and Budgeting Cycle
• First 5 Strategic Planning Process
• First 5 Long Term Financial Planning
• Budget Process
• Fund Allocation Plan

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The Big Picture
Strategic Plan
Long-Term Financial Plan
Budget
Evaluation of Results
Long-term goals, objectives, strategies
Tentative long-term plan for allocating resources
to objectives in strategic plan
Commitment for the use of resources in the next
budget period
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Financial Planning and Budgeting Cycle
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Strategic Plan - Definition

• A commission develops the strategic plan
  through a collaborative process that includes its
  stakeholders. Based on an assessment of the
  environment, a strategic plan includes goals,
  objectives, and strategies for achieving those
  objectives. The California Children and Families
  Act of 1998 includes requirements for developing
  a strategic plan (FMG, 3.2.1.)

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Strategic Plan - The Starting Point
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Strategic Planning Process

• Environmental factors affecting needs and ability
  of First 5 efforts to succeed
• Goals and Objectives, based on analysis
• Programs, services, and projects
• Relationship between First 5 programs and
  community system
• How to measure effectiveness
• Process for setting outcomes and indicators
• Allocation of resources by proposed objectives

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Long-Term Financial Plan Definition

• A commissions long-term financial plan
  illustrates the likely financial outcomes of
  particular courses of action or factors affecting
  the environment in which it operates. The plan
  should assess the long-term financial
  implications of current and proposed policies,
  programs, and assumptions. It should provide a
  long-term view of how resources will be allocated
  to the objectives in the strategic plan.
• (FMG, 3.3.1., 3.3.2.)

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Long Term Financial Plan The Sustainability
Plan

• A comprehensive multi-year analysis of financial
  position, that includes recommendations for
  maintaining a favorable position and provides a
  context for annual budgeting
• Should include analysis of past trends
• Should include forecasts of future revenues,
  expenditures, and reserves for at least six years
• Should include future revenue and expenditure
  levels in a likely scenario
• LTFP should be adopted by the commission
• LTFP should be updated every year in concert with
  budget preparation

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Linking the Strategic Plan, Long-Term Financial
Plan, and the Budget

• Apportionments Allotments
• Encumbrance Controls
• Reporting
• Position Controls
• Budget Amendments
• Rescissions
• Year-End Close-outs
• Budget transfers
• Budget reserves

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Strategic Budgeting the First 5 Way

• The budget process goes beyond
• Balancing revenues and expenditures one year at a
  time
• Traditional line-item expenditure control
• The budget also
• Is strategic
• Encompasses a multi-year financial perspective
  and strategies reflecting long-term goals
• Provides flexibility to managers to be efficient
  and effective

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Budget Process Accountabilities
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NACSLB on the Budget Process

• Mission of the Budget Process
• To help decision makers make informed choices
  about the provision of services and capital
  assets and to promote stakeholder participation
  in the process.
•  
• Key Characteristics of the Budget Process
• Incorporates a long-term perspective
• Establishes linkages to broad organizational
  goals
• Focuses budget decision on results and outcomes
• Involves and promotes effective communication
  with stakeholders
• Provides incentives to government management and
  employees

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NACSLB Four Principles
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10 Steps to First 5 Strategic Budgeting



Note You may do some of these steps as part of
your strategic planning process
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1. Receive Community Input

• Get stakeholder input on priorities for the
  upcoming budget period
• What do citizens value?
• What are citizens priorities?
• What resources are citizens willing to commit?
• Techniques
• Surveys
• Focus Groups
• Town Hall Meetings
• The Commissions strategic plan can be the
  framework for this step

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2. and 3. Provide background information to
decision makers and hold commission planning
session

• Purposes
• Review background information
• Set budget priorities
• Provide direction to staff
• Inputs
• Strategic plan
• Proposed long-term financial plan
• Most recent financial and performance information
• Stakeholder input from meetings or surveys

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4. Prepare Proposed Budget

• Budget Summary The big picture
• Tables
• Show resources related to objectives
• Present at least three years of financial data
• Budget Narrative
• Presents assumptions behind estimates
• Explains significant changes
• Explains relationship between dollars, activities
  and objectives
• Tells the story behind the numbers

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5. 6. Hold Public Meeting and Then Adopt the
Budget



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7. Communicate Budget to the Public through a
Popular Budget



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Communicating with the Public
Annual Report To Public (Results)

• Popular
• Budget
• (Spending Plan)

Citizen Planning Meetings
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8. Budget Administration



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9. 10. Monitor and Report

• 9. Amend the Budget (if necessary)
• 10. Evaluate and Report Results
• Comprehensive Annual Financial Report (CAFR)
• County evaluation studies
• County reports
• Annual Report to State

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Process Example City of San Clemente, California

• Illustrates a connection to budgeting
• Illustrates all three major phases
• Other interesting points
• Financial policy review step
• Issue papers participation
• Separate planning document produced

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Process Example City of San Clemente, California
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Funding Allocation Plan

• Where does the money come from?
• Where does the money go?
• What are our priorities?
• In general - should express in dollars what the
  strategic plan expresses in words.

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Fund Accounting What are funds?

• Separate fiscal and accounting entity used to
  segregate resources related to specific
  activities
• Originally separate bank accounts
• Now just accounting units

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How are funds categorized?

• Tax-supported activities
• Governmental funds
• Business-type activities
• Proprietary funds
• Resources held as an agent or trustee
• Fiduciary funds

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What do proprietary funds measure?

• Economic resources measurement focus
• Focus on net assets (net worth)
• Transactions and events that affect net assets
• Increase net assets
• Revenues/gains
• Decrease net assets
• Expenses/losses

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What do governmental funds measure?

• Current financial resources measurement focus
• Focus on near-term liquidity
• Transactions and events that affect near-term
  liquidity
• Increase net liquid resources?
• Revenues/other financing sources
• Decrease net liquid resources?
• Expenditures/other financing uses

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Practical differences in statement of position

• Proprietary funds
• Report all assets and liabilities
• Governmental funds
• Report only financial assets and liabilities
  normally expected to be paid from those assets.

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Practical differences in statement of operations

• Proprietary funds
• Report depreciation expense
• Do not report debt issuance, debt repayment and
  capital outlay
• Governmental funds
• Report debt issuance, debt repayment and capital
  outlay
• Do not report depreciation expense

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Basis of accounting

• Proprietary funds accrual
• Report when underlying event occurs
• Regardless of timing of related cash flows
• Governmental funds modified accrual
• Report when underlying event occurs
• Only to the extent related cash flows have a
  near-term impact on liquidity

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Fund balance

• Components
• Reserved fund balance
• Net assets unavailable for spending
• Unreserved fund balance
• Net assets available for spending
• Designated unreserved fund balance
• Managements tentative plans for net assets
  available for spending

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Illustration of components of fund balance
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Formal policy on fund balance

• Essential characteristics
• Temporal framework
• Specific plans
• Expand definition of unreserved fund balance,
  when appropriate
• Distinguish GAAP fund balance from Budgetary fund
  balance

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Formal policy on fund balance (cont.)

• Minimum amount for stated purposes
• Point of comparison
• Revenues v. expenditures
• Regular operating items
• Effect of size of government
• Evaluate in context of long-term planning
• First 5 needs to evaluate based on sustainability

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Formal policy on fund balance (cont.)

• Minimum amount for fund balance
• Key environmental factors
• Predictability of revenues
• Volatility of expenditures
• Resources in other funds
• Demands from other funds
• Liquidity
• Designations

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First 5 Fund Balance Issues

• Reserved Amount
• Consistent with Long Term Financial Plan
• How to report in CAFR
• County CAFR
• Independent Commission CAFR

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First 5 Fund Balance (cont.)

• Reserved Funds
• Encumbrances for future periods
• Future payments due to grantees and contractors
• Future payments due on professional services
• Future payments due under lease arrangements

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Fund Balance (cont.)

• Unreserved Designated Funds
• Reserved for Local Initiatives and Program
  Sustainability must meet criteria
• A written plan with specific times, dollars, etc.
• Commission formally approved plan
• Commission certifies it intends to follow the
  plan
• Commission has adopted annual budgets consistent
  with the plans
• Unreserved, undesignated funds
• Portion not allocated or earmarked

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Fund Balance (cont.)

• Reserved funds, continued
• Approved Contracts not yet executed
• Restricted funds not yet obligated
• E.g., funds received from state commission for
  specific programs or initiatives
• Grants received restricted to specific purposes
• Funds Invested in Capital Assets
• Reserved for First 5 CA initiatives matching
  grants

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Fund Balance Reporting
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Questions?
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Budgeting Analysis

• Budgeting Analysis Techniques
• The Budget Document
• Best Practices in Budgeting

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Budgeting Analysis Budget Role in Operations

• Apportionments Allotments
• Encumbrance Controls
• Reporting
• Position Controls
• Budget Amendments
• Rescissions
• Year-End Close-outs
• Budget transfers
• Budget reserves

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Budgeting Analysis Budget Development

• Budget Development
• Funding allocation process
• Estimate revenue available for next fiscal year
• Non-discretionary funding needs subtracted
  (e.g. fringe benefits, reserves)
• Remaining pool allocated based on priorities,
  one-time needs

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Analysis Basics Identifying whats what

• Identify cost drivers
• Benefits
• People
• Contracts

• Identify your priorities
• Existing Programs
• New Initiatives

• Identify Fixed Costs or things you have to fund
• Overhead
• Benefits
• Costs associated with regulations or legislated
  activities

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Decision Tools for Budget Analysis

• 5 basic tools
• Decision tables
• Expected value tables
• Weighted score tables
• Decision trees
• Breakeven analysis
• 7 advanced tools
• Activity-based costing
• Net Present Value (NPV) analysis
• Return on Investments (ROI) analysis
• Cost-Benefit analysis
• Fiscal impact analysis
• Cost-effectiveness analysis
• Sensitivity analysis

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Decision Tree Example
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Cost-Benefit Analysis Example
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Potential Benefits of Technology

• Easier data input
• Improved data analysis and forecasting
• More efficient document publication
• Integrated financial/performance monitoring
• Automated work flows
• Interdepartmental collaboration

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Categories of Solutions

• Spreadsheet systems
• Relational applications
• On-line analytics (OLAP)
• Corporate Performance Management (CPM)

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Budget Formats

• Line-item (object of expenditure) Budgeting
• What are we buying?
• Program Budgeting
• What are we doing?
• Zero-based Budgeting
• What can we cut?
• Performance Budgeting
• What are we accomplishing?
• Budgeting for Outcomes
• What is our strategy? What do we value?

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Budgeting for Outcomes

• First 5 Financial Management Guide recommends an
  outcomes based budget.
• What does this mean?
• How do we reflect what we value in dollars?
• What does it cost to get us where we want to be?

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Example Budget Narrative
In reference material
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Example Operating Budget
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Contract Schedule
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Reserves Balance
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Questions?
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Contracting and Contract Administration

• Contracts
• Provider Selection, Procurement, and Requests for
  Proposals (RFP)
• Notification and Appeals Process
• Performance Monitoring and Reporting
• Contractor Payments

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Contracting Policy Statement

• The distribution of Prop. 10 funds should be
  conducted economically and expeditiously, under
  fair, open, and well-documented procedures, and
  in accordance with best procurement practices.
  Commissions should issue a contract when entering
  into agreements with providers for the use of
  Prop. 10 funds. Contracts should link the
  performance of providers to the objectives of the
  strategic plan through the use of indicators of
  performance (outputs and/or outcomes),
  interagency linkages, or progress on
  sustainability to be achieved. (FMG 1.2)

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Contracting and Procurement Policy

• County commissions must adopt in a public hearing
  contracting and procurement policies that are
  consistent with state law. The policies must
  contain provisions to ensure that the grants and
  contracts are consistent with the county
  commissions strategic plan.

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Procurement Two Methods for Selecting Providers

• Conduct RFP process
• Select a sole source provider

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Requests For Proposals The Basics

• Consider a dollar threshold for using RFPs
• If XXX lt threshold, use informal process
• Should be approved before release
• Notice
• Send to inquiring and relevant parties
• Post on Commission Web site
• Advertise in general circulation newspapers

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Requests For Proposals Elements to Include

• Statement of work
• Selection process
• Time schedules
• Payment terms
• Requirements

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Alameda County

• Contracts in excess of 25,000 require a
  competitive bid process, through an RFP or RFQ
  process
• Refer to Alameda Countys Finance Policies,
  Contracting and Procurement, page 4-5
• Sample RFP Community Grants Initiative
• Sample RFP Lead Agency for Parent Child
  Developmental Playgroup Partnership

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Selection

• Proposal review committee
• Reviewers sign conflict of interest form and
  recuse themselves as necessary
• Proposals scored according to matrix
• Commission gives final approval

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Alameda County Selection Processes

• Community-based review panels with staff
  providing past performance information
• Staff pre-screen proposals, with option to screen
  out up to 25 of proposals
• Internal Staff Review process
• Commission has final approval

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Notification and Appeals Recommended FMG
Procedures

• Notify all applicants in writing
• Offer a de-briefing
• May only appeal on procedural grounds
• Specific ruling or relief requested must be
  stated
• If appeal is upheld
• Refer results back to proposal review committee
• Conduct interviews with bidders and make a
  selection
• Re-open the RFP process

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Alameda County Appeals

• Permit appeals based on administrative error
  only the recommendations of the community-based
  review panel cannot be reversed.

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Sole Source Procurement

• Use only when competition is infeasible
• Justify rationale in writing
• Already attempted competitive procurement
• Only one viable provider
• All local providers to receive funding
• Other non-competitive options
• Intent to negotiate
• Request for information

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Contract Elements

• Scope of Work
• Contract Term
• Contractor Payment
• Terms and Conditions

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Alameda County Contract Elements

• Cover sheet with signatures
• Terms (Legal requirements)
• Exhibit A Program Description and Performance
  Requirements
• Exhibit B Terms of Payment
• Exhibit C Insurance Requirements
• Exhibit D HIPPA Business Associate

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Alameda County

• Format and timeline for contract preparation is
  provided to staff
• See handout for contract boilerplate
• Program staff take lead on development of Exhibit
  A
• Administration reviews all contracts

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Scope of Work Focus on Performance

• Focus on outcomes to be achieved
• Identify performance measures
• Establish reporting requirements
• Identify project milestones
• Address contingencies (conditions for changing
  scope of work)

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Contract Term

• Project work schedule
• When work will be started and completed
• Dates for completion of specific activities

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Terms and Conditions - Examples

• Supplantation
• Assignments and subcontracts
• Allowable vs. unallowable costs
• Program monitoring and evaluation
• Insurance requirements
• Indemnification
• Disputes and dispute resolution
• See Alameda County boilerplate example of terms

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Performance Monitoring/Reporting

• Achieve outcomes identified in contract
• Outline in contract methods to be used
• Reporting guideline enough info. to assess
  performanceno more, no less
• Requirements may vary by provider
• Win voluntary compliance try Winning
  Compliance approach
• Fiscal compliance
• Credit to Peter Hutchinson, President, The
  Public Strategies Group, for this concept.

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Interim Progress Reports

• Work progress to date
• Comparison of work progress to date with contract
  schedule and measures, explain differences
• Expenditures to date
• Comparison of expenditures to date with contract
  budget, explain variances
• Issues or barriers

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Alameda County Variations

• ECChange, web-based interagency data system
• Narrative reports, incl. progress and challenges
• Client satisfaction surveys
• Client services numbers, zip codes
• Stories for annual report
• Accountability frameworks

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Contractor Payment

• Clearly state total price of contract
• Who pays for what
• Procedures for applying for payment
• When payment may be withheld

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Alameda County Payment Options

• 50-40-10 50 upon signing of contract, 40
  midway as progress payment, 10 after approval of
  final report can be modified for two-year grants
• Equal monthly payments with year-end
  reconciliation actuals reported monthly
• Monthly or quarterly payments based on actual
  expenses

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Contracting and Procurement Expanded Audit
Guidelines

• First 5 Commissions should have
• Minutes from public hearing/meeting approving
  contracting/procurement policies
• A written contracting and procurement policies
  document
• Representation letter from commissions legal
  counsel verifying compliance with state law
• Samples of contract and procurement transactions
  to support source documentation

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Questions and Discussion
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Investments

• Fundamentals of Investment
• Establishing an Investment Policy
• Working with Your County Managers or
  Investment Advisors

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Chapter 2 Investment Management
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Types of Investment Risk

• Credit Risk
• Liquidity Risk
• Market Risk
• Interest Rate Risk

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Written Investment Policy

• Specific content required for County government
  (Sec. 2.3.1.1)
• Elements recommended by GFOA are outlined
• Must be presented to the Commission on an annual
  basis at a public meeting/hearing

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Responsibility for Investment Management

• For investment funds in the County pool, the
  County Treasurer is fiduciary
• Commissions may delegate duties to Money Managers
• Commissions may not delegate fiduciary
  responsibility
• Bottom line with regard to legality and
  investment policy compliance lies with Commission

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Permissible Investments

• Model Allowable Investment Instruments
• Model Allowable Short term Instruments
• State or national banks
• Savings associations
• Federal associations
• Credit unions
• Federally insured industrial loan companies in
  California

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Maturities of Investments

• In California, five year limit on maturities
  unless specifically approved more than three
  months prior to purchase

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Internal Controls

• Important to organize and formalize investment
  controls
• Model internal controls document included in
  manual

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Safekeeping

• Best practice to use a safekeeping service
  unrelated to the companies selling the securities
• Custodial account services provided by financial
  institutions
• Reports are received from money managers and
  custodial account and can be reconciled

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Benchmarks

• Commission selects benchmarks that match legal
  authorized investments, investment policy
  constraints and cash flow requirements

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Alameda County Benchmarks

• Local Agency Investment Fund (LAIF)
• Alameda County Pooled Fund (net of fees)
• Lehman 1-5 Government Credit Index

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Investment Management Components

• Investment policy
• Internal procedures
• Cash flow forecasting
• Investment strategies
• Broker/dealer due diligence
• Investment instruments
• Portfolio performance reporting

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Investment Management Responsibilities

• Commission
• Establish policies
• Review investment reports
• Ensure appropriate controls in place
• Commission Staff (ED, CFO)
• Work with cash manager
• Verify manager compliance with policy
• Report to Commission
• Execute appropriate controls

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Alameda County Investment Process

• Receive approval from County Investment Committee
• Develop Investment Policy with assistance from
  outside consultants and volunteers
• Commission approves Investment Policy
• Interview and selection process of potential
  money managers
• Report and receive authorization to retain
  managers and advisors

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Alameda County Investment Process

• Retain money managers (3) and investment advisor,
  phase in investments
• Prepare cash flow analysis
• Develop internal controls procedures
• Monitor first investments review for compliance
• Develop subsidiary ledger (see handout)
• Modify chart of accounts (see handout)
• Prepare first quarterly investment report

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Risk Reward

• No risk no reward
• Know risk know reward
• Portfolio management is risk management
• Double edged sword
• Greater risk increases potential returns
• Greater risk increases potential losses

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Risk - Reward

• Risk
• Type of securities
• Maturity of securities
• Issue size of securities
• Market movement
• Portfolio imbalances
• Non-diversification

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Alameda County Experience

• Initial Investment policy authorized no more than
  30 of total portfolio in each type of securities
  (Sec. VII.1)
• Money Managers asked to increase to 40
• Discussion at Commission level revolved around
  risk tolerance
• Less diversification greater risk
• Commission approved the modification

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Alameda County Experience

• Investment Policy educates
• Commissioners
• Staff
• Community Partners
• Defines the process required

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Reporting Adjusting

• Reporting
• Initial cost of investment
• Stated yield
• Timing (purchase and maturity)
• Performance and benchmarking
• Adjusting investments
• Incorporating revised economic outlook

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Selection of Advisors

• Selection of managers should be addressed in
  policy
• Competitive process should be employed
• Responsibilities of managers should be stated
• Selection criteria should be determined
• Sources for candidates should be identified
• Due diligence on candidates should be undertaken

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Investment Policy Help

• Government Finance Officers Association
• Sample Investment Policy
• [phone] www.gfoa.org
• Association of Public Treasurers
• Model Investment Policy
• [phone] www.aptusc.org

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Additional Guidance
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Questions and Discussion
115
CASH MANAGEMENT

• Commission Responsibilities County Treasury
• Objectives of Cash Management
• Components of Cash Management
• Cash Flow Forecasting

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Objectives

• The cash management system should support
  Commission operations, not the other way around.
• The cash management system must meet all legal
  obligations and constraints placed upon it.
• The cash management program must protect the
  assets of the commission at all times.

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Objectives (Cont.)

• The cash management system should provide
  liquidity to meet expected and unexpected
  obligations.
• The cash management system must be well
  documented and accountable.

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Elements of the Cash Management System

• Evaluating your needs
• Establishing policy
• Establishing objectives
• Develop and manage relationships
• with financial institutions
• Account for what you do

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Cycle

• Forecast cash flows
• Collect revenues
• Make investments
• Track investments
• Make disbursements
• Monitor, evaluate and audit

120
Components of Cash Forecasts

• Receipts and Disbursements
• Projections of anticipated receipts
• Projections of anticipated disbursements
• Cash Balances

121
Benefits of Cash Forecasts

• Improve investment earnings
• Identify temporary cash deficits
• Ensure liquidity
• Enhance creditworthiness
• Warn of budget and cash flow problems

122
Types of Cash Forecasts

• Annual forecasts provide monthly estimates of
  cash position.
• Use for determining investments over
• 30 day maturity.
• Monthly forecasts provide weekly estimates of
  cash position.
• Use for determining investments with
• 0 90 day maturity.

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Types of Cash Forecasts(Cont.)

• Weekly forecasts provide daily estimates of cash
  position.
• Use for determining investments less than 7 day
  maturity.

124
Evaluating Costs and Benefits of Cash Forecasting
Methods

• Time and resources available
• Amount of cash balances
• Desire to improve cash management
• Need for accurate cash information
• Investment options

125
Developing Cash Forecasts

• Examine 3 5 year historical patterns of
  receipts and disbursements from monthly financial
  reports recurring and non-recurring items.
• Analyze current budget revenues and expenditures.

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Developing Cash Forecasts(Cont.)

• Develop a schedule of current investment
  maturities.

127
Forecasting Receipts

• Establish categories.
• Prop 10 funding disbursements
• Investment income and maturities
• Other receipts

128
Forecasting Receipts (Cont.)

• Steps to forecasting
• Develop historical analysis of monthly receipts -
  and of annual.
• Create forecast of monthly receipts based on
  budget and historical distribution.

129
Creating a Cash Forecast

• Beginning balance
• Monthly revenue projections
• Monthly expenditure projections
• Net change
• Cumulative balance

130
Updating and Reviewing Cash Forecasts

• Regular updating improves accuracy and provides a
  database for future projections.
• Rolling forecasts add a new month or quarter as
  each one is completed.
• Adjust for unanticipated events.
• Conduct annual review of cash forecast vs. actual
  results to identify reasons for variances.

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Questions?